Global Tips

What You Need to Know About FATCA

ByLee Curthoys

FATCA, or the Foreign Account Tax Compliance Act, is a system of information exchange started by the U.S. Internal Revenue Service (IRS). FATCA was enacted into law in March 2010 in response to U.S. corporations and individuals perceived to be sheltering funds in overseas accounts to avoid paying U.S. taxes. To prevent this, FATCA makes foreign financial institutions (FFIs) report information on U.S. account holders, or possible U.S. account holders, to the IRS. Non-participating FFIs face a punitive 30% withholding tax on any fund flow from the U.S. or from any participating FFI (even when those funds are not U.S.-sourced).

In order to effectively manage the program, the United States entered into intergovernmental agreements (IGAs) with authorities in other countries. Under these IGAs, FATCA information is typically reported to the local tax authority and then passed to the IRS. In return for receiving sensitive information under this structure, the IRS does not apply the previously mentioned 30% withholding tax. In addition, the United States will reciprocate and report information on relevant foreign individuals and entities in the United States to the cooperating tax authority. Finally, under an IGA, FATCA rules become local law, not just U.S. law.

Given this fundamental shift in information reporting, FATCA has taken a number of years to come into full effect, with most reporting only taking place for the first time in 2016. This may be the reason your bank has started asking you a lot of questions recently. Read the full blog article here.